Commission · Incentive
Commission / Incentive
What is a commission?
- Performance-based pay tied to results
- 'What you reward' determines behavior
- Balanced design prevents distortion
Change one line of the compensation system and the shape of next month’s pipeline changes. At quarter end, salespeople open their own statements and work backward to figure out 'where to push to get paid.' That is why a commission table carries as much weight as a sales strategy document. Compensation design is, in effect, a sales organization’s statement of priorities. No matter how much executives stress profitability in meetings, if the payout formula has no margin term, the field will keep chasing revenue numbers.
Commission is variable pay calculated by applying a rate to the revenue or profit on each deal. An incentive is closer to a bonus paid in tiers based on quarterly or annual attainment. Korean B2B companies typically split base pay and variable pay between 70:30 and 50:50. They first set the annual on-target earnings (OTE) a rep takes home at 100% attainment, then work backward to the rates. The usual control levers are an accelerator that applies 1.5–2x the rate above 100% attainment, a cap that sets a ceiling, and a clawback that recovers payouts if a contract is terminated within six months. For subscription and maintenance revenue, tie the rate to whether the customer is retained at 12 months, not to the win date, so that cash on the books and compensation line up.
Easily confused with commission is the SPIF. It is a short, one-off award, such as KRW 300,000 (≈ US$225) per deal, used when you want to push a new product for just one quarter. It briefly shifts focus without touching the standing commission table. For large deals that no one wins alone, split rules that divide credit, such as 60:25:15 among the sales rep, pre-sales, and customer success, must be put in writing before the deal closes to avoid conflict at payout time.
A common misconception is that 'a higher rate makes people work harder.' What actually drives motivation is payout timing and transparency of the calculation more than the rate. If payouts arrive three months later, or reps can’t calculate their own commission, the plan might as well not exist. Another trap is piling on metrics. Stack five metrics (revenue, margin, new business, renewals, satisfaction) at 20% each and none of them changes behavior. It is safer to keep metrics to three or fewer, and to check for distortions every quarter. Quarter-end push-ins, a flood of discount approvals, and relabeling confirmed renewals as new business are not individual misconduct. They are behaviors the plan itself rewards.
John KimAuthor of B2B Marketing Design and CEO of Nanum Consulting
Jaehyuk ParkHands-on instructor in B2B technical sales and AI-driven sales strategyA core tool of sales compensation management, it has evolved into a way of linking pay to performance, drawing on motivation theory.
Consider a hypothetical case. Company A, an industrial measurement-equipment distributor with 140 employees and KRW 32 billion (≈ US$23,941,300) in annual revenue, grew revenue 8% last year, yet its operating profit actually fell by KRW 120 million (≈ US$89,800). All 12 salespeople ran on a single commission, 1.5% of booked revenue, and 15% discount approval requests piled up at every quarter-end. Here is how the company redesigned its compensation system over six months.
- When the VP of Sales went through about 800 deals over two years, the top three commission earners averaged a 12.4% discount, 5 points higher than those at the bottom. 'The people who sell the most are also discounting the most,' someone said in the meeting.
- Together with the finance director, we changed the payout basis from revenue to contribution margin. We built a three-tier structure, a 2.0% rate for margins of 25% or more, 1.2% for 20–25%, and 0.5% below 20%, so that every extra discount costs the rep money.
- Maintenance contracts were handled separately: a clause pays 1% of contract value 12 months after renewal, and the same line states a clawback that recovers the payout if the contract is terminated within 6 months.
- When reps pushed back that 'this will cut my pay,' the CEO guaranteed OTE at 110% of the previous level. For the first two quarters, a grace period paid whichever was higher, the old method or the new one.
- The payout sheet was shared as a single Excel file so reps could calculate their own pay, and the payment cycle was shortened from quarterly to the 10th of each month, covering the prior month.
- Two quarters later, the average discount rate had moved from 12.4% to 7.9% and operating margin from 4.1% to 6.3%. Revenue fell 3%, but the maintenance renewal rate rose from 71% to 86%, building a larger recurring-revenue base for the following year.